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What are 'Footnotes To The Financial Statements'

Footnotes to the financial statements refer to additional information that help explain how a company arrived at its figures and to explain any irregularities or perceived inconsistencies. Footnotes to the financial statements thus report the details and additional information that are left out of the main parts of reporting documents such as the balance sheet and income statement. This is done mainly for the sake of clarity because these notes can be quite long, and if they were included in the main text they would cloud the data reported in the financial statement.

It is very important for analysts and investors to read the footnotes to the financial statements included in a company's periodic reports. These notes contain important information on such things as the accounting methodologies used for recording and reporting transactions, pension plan details and stock option compensation information — all of which can have material effects on the bottom-line return that a shareholder can expect from an investment in a company. Footnotes also explain in detail why any irregularities such as a one-time charge has occurred and what its impact may be on future profitability. These are also sometimes called explanatory notes.

BREAKING DOWN 'Footnotes To The Financial Statements'

Footnotes on financial statements serve as a way for a company to provide additional explanations for various portions of their financial statements. It functions as a supplement, providing clarity to those who require it without having the information placed in the body of the statement. Nevertheless, the information included in the footnotes is often very important, and may reveal underlying issues with a company's financial health.

Information Contained Within Footnotes

Footnotes may provide additional information used to clarify various points. This can include further details about items used as reference, a clarification of any applicable policies, a variety of required disclosures or adjustments made to certain values. While much of the information may be considered required in nature, providing all the information within the body of the statement may overwhelm the document, making it more difficult to read and interpret by those who receive them. Importantly, a company will state the accounting methodology used, if it has changed in any meaningful way from past practice, and whether any items should be interpreted in any way other than what is conventional. For example, footnotes will explain how a company calculated its earnings per share (EPS), how it counted diluted shares and how it counted shares outstanding.

The Use of Footnotes

Using footnotes allows the general flow of a document to remain appropriate by providing a way for the reader to access additional information if they feel it is necessary. It allows an easily accessible place for complex definitions or calculations to be explained should a reader desire the additional information.

Often, the footnotes will be used to explain how a particular value was assessed on a specific line item. This can include issues such as depreciation or any incident where an estimate of future financial outcomes had to be determined.

Footnotes may also include information regarding future activities that are anticipated to have a notable impact on the business or its activities. Often, these will refer to large-scale events, both positive and negative. For example, descriptions of upcoming new product releases may be included, as well as issues about a potential product recall.

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